CVS 2000 Annual Report Download - page 20

Introduction
We strongly recommend that you read our accompanying
audited consolidated financial statements and footnotes along
with this important discussion and analysis.
Results of Operations
Fiscal 2000, which ended on December 30, 2000 and fiscal 1998,
which ended on December 26, 1998, each included 52 weeks.
Fiscal 1999, which ended on January 1, 2000, included 53 weeks.
Net sales increased 11.0% in 2000 to $20.1 billion.This compares
to increases of 18.5% in 1999 and 11.1% in 1998. Same store sales,
consisting of sales from stores that have been open for more
than one year, rose 10.9% in 2000, 12.5% in 1999 and 10.8% in
1998. Pharmacy same store sales increased 17.7% in 2000, 19.4%
in 1999 and 16.5% in 1998. Our pharmacy sales as a percentage
of total net sales were 63% in 2000, 59% in 1999 and 58% in
1998. Our third party prescription sales as a percentage of total
pharmacy sales were 89% in 2000, 87% in 1999 and 84% in 1998.
As you review our sales performance, we believe you should
consider the following important information:
•Our pharmacy sales growth continued to benefit from our
ability to attract and retain managed care customers and
favorable industry trends. These trends include an aging
American population; many “baby boomers” are now in their
fifties and are consuming a greater number of prescription
drugs.The increased use of pharmaceuticals as the first line
of defense for healthcare and the introduction of a number
of successful new prescription drugs also contributed to the
growing demand for pharmacy services.
•Our front store sales growth was driven by strong performance
in the general merchandise, health and beauty, convenience
foods and film and photofinishing categories.
•The increase in net sales in 2000 was negatively affected by
the 53rd week in 1999. Excluding the impact of the 53rd
week in 1999, comparable net sales increased 13.4% in 2000
when compared to 1999.
•The increase in net sales in 1999 was positively affected by
the 53rd week in 1999. Excluding the impact of the 53rd
week in 1999, comparable net sales increased 16.0% in 1999
when compared to 1998.
•The increase in net sales in 1998 was positively affected by
our efforts to improve the performance of the Revco stores,
which we acquired in 1997.To do this, we converted the
retained Revco stores to the CVS store format and relocated
certain stores. Our performance during the conversion period
was positively affected by temporary promotional events.
•We continued to relocate our existing shopping center stores
to larger, more convenient, freestanding locations. Historically,
we have achieved significant improvements in customer
count and net sales when we do this.The resulting increase
in net sales has typically been driven by an increase in front
store sales, which normally have a higher gross margin.We
believe that our relocation program offers a significant
opportunity for future growth, as only 39% of our existing
stores are freestanding. We currently expect to have
approximately 44% of our stores in freestanding locations
by the end of 2001. Our long-term goal is to have 80% of our
stores located in freestanding sites. We cannot, however,
guarantee that future store relocations will deliver the
same results as those historically achieved. Please read
the “Cautionary Statement Concerning Forward-Looking
Statements”section below.
Gross margin as a percentage of net sales was 26.7% in 2000.
This compares to 26.9% in 1999 and 27.0% in 1998. As you
review our gross margin performance, please remember to
consider the impact of the following nonrecurring charge:
•During 1998, we recorded a $10.0 million charge to cost of
goods sold to reflect markdowns on noncompatible Arbor
merchandise, which resulted from the CVS/Arbor merger
transaction. Please read Note 10 to the consolidated financial
statements for other important information about the
CVS/Arbor merger.
If you exclude the effect of this nonrecurring charge, our
comparable gross margin as a percentage of net sales was 26.7%
in 2000, 26.9% in 1999 and 27.1% in 1998.
Why has our comparable gross margin rate been declining?
•Pharmacy sales are growing at a faster pace than front store
sales. On average, our gross margin on pharmacy sales is
lower than our gross margin on front store sales.
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
18
CVS Corporation